State program became for-profit before securing Northern Beef financing

A South Dakota economic development office’s spin-off into a for-profit company is under the microscope as lawmakers vow to look further into the state’s role in financing the bankrupt Northern Beef Packers.

By:
Denise Ross ,

A South Dakota economic development office’s spin-off into a for-profit company is under the microscope as lawmakers vow to look further into the state’s role in financing the bankrupt Northern Beef Packers.

The for-profit company, created in January 2008, secured much of the money that built the Aberdeen beef plant, the most notorious of several South Dakota economic development projects fueled by foreign investment money.

Why and how that office moved from a state-run enterprise to a private endeavor is at the center of ongoing interest in the beef plant and the individuals who moved the money to build it.

Former Gov. Mike Rounds approved the switch, and he says the move brought practices in South Dakota in line with similar economic development offices throughout the nation.

“It’s pretty simple,” Rounds says. “At that time, we had about 500 competitors. The vast majority of them were not connected with state agencies. I think we were one of only two in the entire nation. The other ones could offer different services than we could, and they could be more involved in coordinating loans for different projects.”

Feds sanctioned local agencies

The for-profit company — SDRC Inc. — and its state-run predecessor coordinated the federal EB-5 economic development program that had a simple premise — wealthy foreigners could invest at least $500,000 in American business ventures and be awarded permanent visas that would allow themselves and family members to live anywhere in the United States. (EB-5 stands for “employment-based” immigration, fifth category.)

A federal agency designates so-called “regional centers” around the country through which the foreign investments are funneled. Regional center employees identify business projects that are good candidates for EB-5 funds, then frequently travel overseas — often to China — to promote those projects to investors. Investors choose which projects their money will fund.

Since 2004, South Dakota’s regional center had been the South Dakota International Business Institute at Northern State University in Aberdeen. In January 2008, state officials agreed to transfer the regional center operations to the new private entity — South Dakota Regional Center Inc.

Rounds says standing apart as a state-run entity had caused potential investors to question the structure of South Dakota’s EB-5 regional center.

“When it came to competing with the rest of them as well, since they were independent and separate, people would look at it and say, ‘Why are you different from the rest of them? Why are they independent and you’re part of a state operation?’” Rounds says. “It appeared to be an appropriate move to follow what the rest of them were doing.”

More legislative hearings

A contract between the state and SDRC Inc. governed the switch from a public office to a private corporation and set up an ongoing relationship between SDRC Inc. and the Governor’s Office of Economic Development.

Several state lawmakers are seeking oversight hearings on this matter by the Legislature’s Government Operations and Audit Committee.

Democratic gubernatorial candidate Rep. Susan Wismer of Britton sits on the committee and says the propriety of that contract tops her list of questions.

“My focus is on the SDRC Inc. contract,” Wismer says.

The next committee meeting has been scheduled for May 7 in Pierre, and chairman Sen. Larry Tidemann, R-Brookings, says the panel will continue looking into Northern Beef Packers and the state’s role in financing its construction and operations. The committee held one hearing on March 7 devoted entirely to the EB-5 program and related issues, but it was unclear afterward whether the committee would hear more testimony at future hearings.

“There will be another GOAC meeting,” Tidemann says. “The total focus will not be on EB-5 and the Governor’s Office of Economic Development, but we will do follow-up on that.”

State contract set up fee structure

For Rep. Kathy Tyler, D-Big Stone City, the question gets even more specific than the shift to a private entity. She wants the committee to look into how SDRC Inc. set up a fee structure that gave itself a percentage of each deal it guided through the EB-5 process. When millions were invested in each of dozens of projects, that had to add up to millions in profits for the private corporation, she says.

“Think of the millions that were made that the state could have had,” says Tyler, who is not a member of the Government Operations and Audit Committee but has been vocal about the Legislature’s need to investigate this issue.

For his part, Rounds says he was aware in general that SDRC Inc. would need to fund its operations.

“We knew there had to be a way in place to fund the operation. We understood that,” Rounds says without elaborating further.

He says he did not directly review the legal agreements between the state and SDRC Inc. that included some details about the development center’s fee structure, but rather relied on an attorney working on behalf of the state to do that.

“That’s not something the governor would look at,” Rounds says. “We have numerous contracts, literally hundreds a year that go through state government. Your attorneys look through them.”

The contract was signed by then-Secretary of State Development Rich Benda, who was found dead Oct. 20, 2013. His death was ruled a suicide, and state officials revealed that Benda had been questioned by federal investigators probing the financing of Northern Beef Packers.